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World Economic Survey 1987

Current Trends and Policies in the World Economy

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The modest expansion that characterizes the world economy during most of the first half of the 1980s persisted in 1986. Inflation has decelerated considerably and industrial countries are entering their fifth year of expansion, though at a slow pace. The world economy appears to be set in a slow growth path, which is likely to delay the great adjustments required at the national and international levels. The continuation in 1986 and early 1987 of the trade imbalances of the larger industrial economies has added to the strains on the world financial and trade systems.

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The international oil market

The year 1986 saw very sharp fluctuations in the price of oil. During the first seven months, oil prices plummeted about 64 per cent and recovered by about 36 per cent in the rest of the year. At year-end the price was roughly 51 per cent below its level one year earlier. The short-run effects of the price drop on oil demand and supply were considerable. On the demand side, the immediate effects on oil consumption surpassed expectations based on past estimates of the elasticity of oil demand with respect to oil prices. On the supply side, the situation was more complex as the expansion of oil production was cause as well as effect of the slide in prices. Another important implication was the pronounced shift in income from oil exporters to oil importers. The 1985-1986 oil shock largely reversed the income effects of the two oil shocks of the 1970s.

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